The UK's cooling labour market is questioning the need for further interest rate hikes, according to James Smith, developed markets economist at ING. He argues that unless there is a 'severe and prolonged spike' in energy prices due to the Middle East war, the Bank of England (BoE) will likely keep rates on hold until next spring, before cutting rates at least twice in 2027.
Mixed signals in the jobs market
Smith, who has analysed the latest official data, notes that while the UK economy may be picking up speed, as hinted by last week's GDP figures, the jobs market shows little sign of acceleration. However, the picture depends on where you look. The government is still actively hiring, a trend seen throughout this year. Payroll growth is running at 1.1% on a three-month annualised basis, though Smith doubts this can continue given more austere public spending plans ahead.
In sharp contrast, consumer-facing industries such as hospitality and retail have been consistently shedding jobs, with the pace of decline worsening. This follows ongoing pressure since last year's tax and minimum wage hikes. The remainder of the private sector is flatlining, and apart from last week's more optimistic KPMG/REC hiring survey, most other surveys do not indicate an imminent upturn.
Wage growth divergence
The disconnect between sectors is clearly visible in wage growth. Pay is rising by 6.1% across government, compared to just 2.8% in the private sector. Smith acknowledges that the latter figure is being slightly depressed by 'compositional' effects, a point the BoE is keen to highlight. Still, the basic story is that the jobs market is cool.
This is evident in vacancy numbers, which are still gradually falling and are well down on pre-Covid levels. It is also visible in the unemployment rate, notwithstanding the latest reliability issues. Crucially for the Bank of England, there is little sign that wage growth is about to turn higher.
Outlook for interest rates
Barring a severe and persistent spike in energy prices, Smith expects the Bank will keep rates on hold until next spring, before cutting rates at least twice in 2027. This assessment underscores the delicate balance the BoE faces between inflation and economic growth, as the labour market cools and wage pressures remain subdued.
